Any small-business owner considering the purchase of a tax lien should follow a due diligence checklist. A due diligence checklist acts as a step-by-step guide for preparing to purchase a property and includes a complete list of questions needed for all stages of the purchasing process. The due diligence checklist for tax lien sales focuses on the value of the property under the lien and the market risk involved in the purchase.

Count The Costs

Businesses that purchase property tax liens must understand that purchasing the lien is not the same as purchasing the property. The lien buyer agrees to pay any outstanding taxes on the property and is, in most states, first in line to purchase the foreclosed property. The tax lien buyer should also be sure that the property is in such a condition that the buyer can gain a substantial return on the purchase. The costs of the lien can also include recording fees, additional tax payments and potential foreclosure costs, so the buyer should find out if he can recover those costs after purchasing the lien.

Verify The Lien

Another step in the checklist is to verify the tax lien on the property. Some tax lien listings can contain erroneous information, so the buyer should verify the listed address. The prospective buyer should also gather as much data on the property under lien as possible. Such data can include the amount of taxes owed on the lien, the property's assessed value, if the property is still under a mortgage and if the owner has filed for bankruptcy protection. If the owner has declared bankruptcy, made a recent or partial payment or if the property is owned by a government agency, the lien sale will be invalid, and the buyer will receive a refund.

Check Local Laws

Each jurisdiction has variations in their laws covering tax lien sales. Small-business owners should check with their state and local agencies to determine the rights that tax lien holders carry when acquiring foreclosed property. For instance, in New Jersey, the tax lienholder is in the first position to be compensated in case of a foreclosure. The laws can also vary within a state. For example, some counties in Arizona have regulations that state that if the lienholder does not pay any subsequent taxes owed on the property after purchasing the lien, the county will sell the lien at its next tax sale. Other counties only allow for a single tax lien certificate on a property.

Examine The Property

The best way a small-business owner can determine if the property under a tax lien is worth the amount needed to purchase the lien is to conduct an on-site inspection of the property. Properties can sometimes lose value due to natural disasters, industrial pollutants or general neglect. The on-site inspection can also help assess the areas surrounding the property. Most jurisdictions have zoning laws that dictate what businesses can be established within specific areas, so an on-site inspection can enable prospective tax lien buyers to determine the types of businesses in the area and the extent of any competition for customers, vendors and resources.

Know The Sale Terms

Prospective buyers should take the time to study the terms of tax lien sales in their jurisdiction. While some sales work on a conventional auction system, others use an interest-rate bidding system that rewards buyers who accept the lowest interest rate. Many states also require that prospective buyers carry documentation to establish their ability to cover the costs of the lien, such as income tax forms or bank statements. Other jurisdictions may require a cash deposit before the buyer is allowed to participate in the auction. The deposit can be either a flat amount or a percentage of the total bid.

About the Author

Living in Houston, Gerald Hanks has been a writer since 2008. He has contributed to several special-interest national publications. Before starting his writing career, Gerald was a web programmer and database developer for 12 years. He also started Story Into Screenplay, a screenwriting blog at www.StoryIntoScreenplay.com.